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Find YOUR Path through the Investment Maze!
By jmh | May 25, 2006
Investing … We read and hear about it daily. Many of us wonder where to start and just what to invest in. Should we simply stick money in a CD, wait and hope for the best? Or would we be better off looking for something else to do with our money (like investing)?
Well, first of all, there is saving money and then there is investing money. The difference between the two can be summed up with one word: Risk!
When someone puts money in the bank into some sort of savings vehicle, the expectation is to get a certain, predetermined amount of interest in exchange for leaving money with the bank. The dollars deposited are safe and usually insured up to a certain amount.
When someone buys an investment, i.e. puts money into some sort of investment vehicle, the amount of return received on the investment is not predetermined, usually varies and is not necessarily safe nor guaranteed. Hence, purchasing an investment generally means taking some sort of risk! But then again, people invest because they are looking for a greater return than they would get with savings.
At this point you might ask what to invest your hard earned money in? Well, let’s see there are Stocks, Bonds, Mutual Funds, Annuities, Options, Futures, Forex, REITS, etc. And then there is Real Estate (residential, commercial and raw land) and businesses that you could invest in. Wow!
Is your head spinning already? I don’t know about you – but mine sure is!
Well, how do you decide if investing is for you and what investment vehicle to go with? To find the answer, ask yourself three basic questions. (This process sounds a bit backwards, I know!).
1. Do you have money to invest?
2. What are your overall investment objectives?
3. How much risk can you comfortably tolerate?
Do you have money to invest?
Even though this seems obvious, it is worth our discussion. Is an investment the best choice for you at this time? Do you have enough money to cover ongoing personal/family expenses? Is there any outstanding debt that needs to be paid? Do you have adequate insurance coverage to help you through potential hard times? Do you have enough cash reserves to cover unexpected expenses (a rainy day fund)? Or would it be better to use the money now to pay down debt, save for a rainy day, etc?
What are you trying to accomplish?
People invest for many reasons. Are you investing for the short term or the long term? For example, do you need money in a few years for home improvements, to send your kids to college or to supplement your own retirement in years to come?
Depending on your reason for investing and time frame, your choice of investment vehicle will be very different.
Another question to ask might be the tax consequences of different investment choices. Are you trying to minimize current taxes, or are you more concerned with taxes upon your retirement? Again, how you answer these questions will affect the type of investment available to you.
How much risk can you comfortably tolerate?
Investments vary in the amount of risk from the safe (CDs, secured bonds, etc.) to the risky (.com stocks!, foreign investments, etc.). If your investments keep you up at night, it might to time to rethink!
Do you have expertise in any area of investing? Are you willing to learn about investing? Will you actively manage your investments or will you hire someone? How much time are you prepared to devote to your ongoing investment efforts? Without a doubt, some degree of knowledge will be helpful in assessing different investment classes available to you.
Once you have answered these three questions, you should be ready to start shopping for investments that fit your specific criteria and let you get some sleep at night!
©2006 Johanna Hofmann, MBA
Tag: My Investments
Topics: Investments |
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